Tuesday, May 7, 2013

What is “Scarcity”?

There is massive confusion today in economics about the meanings of "economic scarcity" and "insufficiency."  We need to address this because confusing the two leads to some very, very, very bad decisions.

Economic scarcity means that at X point in time, a fixed amount of everything exists, and that you cannot use the same resource in two things or places at the same time.  That's it.  Period.  It says nothing about how much X existed a moment prior, or will exist a moment later.  It is, however, the basis for the statement that, in economic terms (an important qualifier) “everything is scarce.”

What economists have done, however (thanks to the flawed theories of the Reverend Thomas Malthus) is say that because human wants and needs can never be satisfied, and because in everything is scarce, there can never be enough to go around.

There are two logical flaws in such thinking.  One, human wants and needs can be satisfied.  The whole theory of marginal utility is based on that assumption, and it appears to be true.  Every additional unit of something you obtain or use (absent some mental aberration) gives less satisfaction until the final unit adds zero or negative satisfaction.  At that point the normal person will stop.

Two, the important qualifier “in economic terms” is almost always omitted, and the popular sense of “scarcity” meaning “insufficiency” is thereby implied.

Economic scarcity is not, however, the same as insufficiency.  First, of course, under population pressure, people tend to become more productive, as Jane Jacobs pointed out.  Second, people also become more creative, inventing or discovering substitutes for insufficient resources.  Third, they tend to engage in what R. Buckminster Fuller termed “ephemeralization,” or “doing more with less.”  Finally, people tend to develop technologies to carry out the ephemeralization and do more with less in the most efficient manner possible.

Unfortunately, what happens and creates the illusion of insufficiency is that as technology replaces human labor and workers are unable to replace labor income with capital income, consumptive capacity (“demand”) becomes concentrated in the hands of those who own capital.  Those who have only labor are unable to produce.  Unable to purchase what others produce with capital with what they are unable to produce with their labor (Say’s Law), consumption and production are thrown out of sync.

Kelso pointed out that if all new capital were to be financed out of future savings (the present value of future increases in production) instead of past savings (the present value of past cuts in consumption), and if people who currently have only their rapidly depreciating labor to sell can finance capital acquisition using future savings, production and consumption will once again be connected, and the illusion of insufficiency dispelled.

This will have the added benefit of reducing population pressure and thus demands on insufficient resources.  Poor people tend to have many children.  Middle classes tend to increase slowly and remain stable over time.  The rich often fail to reproduce.  Fuller believed this to be a compensating mechanism inherent in nature; others think it may be psychological, but it does, in fact, happen.


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